New York State Sales Tax and the Choice of Business Entity
Barnett, Robert S., The CPA Journal
Protection from personal liability is often a large factor in the choice of business entity. Asset protection plays a large role in structuring financial and business affairs. The risks associated with sales tax liabilities are often overlooked, but such liabilities can be avoided.
New York Tax Law section 1133(a) imposes personal liability for unpaid sales and use taxes upon "persons required to collect tax." In a corporate context, the persons required to collect and remit sales and use taxes include any employed officers, directors, or managers who are under a duty to act for the corporation [see section 1131(1)].
In matters before the New York State Tax Commission involving personal liability for sales and use taxes, the result often turns on an analysis of whether such a person was under a duty to act for the corporation. Merely holding a corporate office does not automatically result in strict liability [see Chevlowe v. Koerner, 407 N.Y.S 2d 427 (1978)]. The inquiry as to whether a person is responsible for collecting and paying sales and use taxes involves a thorough investigation of all the relevant facts and circumstances. The central inquiry is whether the individual had sufficient authority and control over the affairs of the corporation. In such an instance, the person will be considered an officer or employee responsible for payment of the taxes assessed [Matter of Constantino (Tax Appeals Tribune, September 27, 1990)]. The notice of determination issued by the New York State Tax Department is accorded a presumption of correctness [Petition of John P. Bartolomei (NYS Tax Appeals Tribunal TSB-D-96(28S), April 3, 1997)]. Therefore, the burden of proof rests heavily upon taxpayers to present sufficient support and confirmation regarding their responsibilities.
The New York State Tax Commission considers various factors in making the determination as to whether an individual should be held personally liable for the sales and use tax imposed. They include:
* The individual's corporate status as a director or officer;
* The individual's status as a shareholder, and the percentage of shares owned;
* The individual's participation in formal or informal shareholders' meetings, directors' meetings, and other corporate formalities;
* The individual's participation in corporate accounting and bookkeeping functions;
* The individual's knowledge of, and control over, the financial affairs of the corporation;
* The individual's authorization within the corporation to perform management functions, such as employee hiring and firing;
* Whether the individual controlled the actions of others or was controlled by others;
* Whether the individual signed tax returns and met with accountants;
* Prior assessments against the corporation, and its history of delinquency;
* Involvement in the day-to-day business operations; and
* Whether the individual was authorized as a check signatory. …